US Dollar Price Action Setups in Central Bank Week

US Dollar Talking Points:

• Like the last non-quarterly rate decision at the Fed, the USD has sold off as the focal point was squarely on Kevin Warsh at yesterday’s meeting.
• In Europe, Christine Lagarde announced the early departure from her post, to leave in February a full nine months early.
• Given the still loaded carry trade, the Bank of Japan’s meeting holds incredible influence across the USD complex and while the wide expectation is for the bank to push a hawkish hold, the bigger question is how much Ueda wants to see Yen strength.

We’re still very much in the ‘getting to know you’ stage with Kevin Warsh and yesterday brought his fourth rate decision atop the Fed. Previously, we’ve had two quarterly meetings which came with updated guidance and projections from the rest of the bank and just one non-quarterly meeting where it was the statement and the accompanying press conference.

As I said in the Tuesday webinar, the non-quarterly meetings give Warsh even more sway as the focal point is squarely on the Fed chair as opposed to the opinions of the rest of the bank and where they think growth, inflation and rates will go. And to this point, the quarterly meetings, in June and September, have brought a massive response of strength in the USD while the one non-quarterly meeting in July was a decisive move of USD-weakness.

So far, yesterday’s meeting has been one of USD-weakness as well, and that sell-off has so far continued through today’s trade. On the below chart, each of those four meetings are identified with a dashed vertical line.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

The Euro has been hit by a confidence problem, of late. The EUR/USD pair went deep into oversold territory and bulls had every opportunity to evoke a reversal. But, seemingly, buyers were unable to push the turn and prices simply reverted right back to the lows with a matched print of the prior low on yesterday’s candle.

There was even a dip below and a test that turned into a false break earlier this morning, but, so far, buyers have responded in a big way.

While the ECB didn’t hike rates it was perhaps the announcement from Christine Lagarde that she would be stepping down nine months early that brings the prospect of change to the matter.

Bulls have responded but it’s still quite early, and there’s some possible resistance sitting overhead. Bigger picture, it’s the zone from around 1.1275-1.1285 that bulls would need to take out to provide a convincing argument that a larger turn may be afoot.

EUR/USD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/USD: Cable Cleanliness

For USD-weakness I’ve been tracking GBP/USD, and have looked into this over the past two weeks in webinars.

Last week, I cautioned from chasing as price was testing a big spot of resistance, around the 23.6% Fibonacci retracement of the same setup that caught the low at the 38.2. Instead, I looked at support potential from prior resistance and then this week, price was tip-toeing down to that zone and, so far, it’s been a clean test there with the bottom at 1.3275 holding the low and the top, around 1.3300 holding a higher-low.

For USD-weakness to continue I still think this is a more attractive backdrop given structure, for now.

GBP/USD Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

For USD-strength I think USD/JPY is still more attractive, for now. The Bank of Japan rate decision tonight could possibly change that but this would be very uncharacteristic for a traditionally conservative central bank that tries not to surprise markets too much. The widespread expectation is for the BoJ to push a hawkish hold, and, like the Fed, hike in December after a hold in October.

If the BoJ truly does want to prod Yen-strength they have an open door to surprise tonight, as the announcement would likely compel some degree of carry unwind which would expose the bearish side of the pair and, in-turn, US Dollar weakness.

For now, there’s higher-low support structure in-play with 157.50, 157.22 and 157.00 as short-term levels, and then the 155.00-155.37 zone a bit lower.

USD/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro